SERVICE SECTOR
Dynamic demand
Americans who harbor doubts about the economic rebound point to manufacturing, which seems interminably stuck in low gear. A 3-year hiring drought at the nation’s factories has sent upwards of 2 million workers looking elsewhere for work.
Yet while production of goods remains moribund, a booming service sector has picked up much of the slack. As Americans age or seek more luxuries for their lifestyles, the need for services appears never-ending.
The pulse of services is taken again Tuesday, with the Institute for Supply Management’s non-manufacturing survey results for July. The index surged to 60.6 in June from 54.5 in May.
Economist Sung Won Sohn is looking for a slight pullback, to somewhere in the high 50s, if only because it has made such a rapid and unexpected advance.
“There is no question that such services as education, health care and the financial sector have held up far better than manufacturing,” said Sohn, of Wells Fargo & Co. in Minneapolis.
Since early 2001, he said, 90 percent of the nation’s job losses have occurred in the factory sector, and the trend seems to be continuing.
Services have become so dominant in the economy, Sohn said, that they comprise between 80 percent and 85 percent of all jobs. In addition, services have accounted for 60 percent of the rise in consumer prices.
INTEREST RATES
Fed standing pat
A dramatic rebound for yields on long-term debt has pushed interest rates higher, in the most stunning reversal since 1987. The rapid climb got under way after Federal Reserve Chairman Alan Greenspan testified before members of Congress on July 15, offering a bright view of the future.
With nine days remaining before members of the Fed meet, there isn’t much question about what will happen. The central bankers will do nothing.
A greater concern is whether policymakers went too far in late June by lowering the Fed’s short-term interest rate target to a flat 1 percent, a 45-year low.
Chicago economist Brian Wesbury says with the current low rates, “the Fed has the pedal to the metal. The goal is to get the economy to run a little bit hotter.”
But Wesbury, of Griffin, Kubik, Stephens & Thompson, an investment firm, sees little likelihood that policymakers will reverse course soon. His bottom line:
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“There still is quite a bit of slack in the economy, even though there has been an incredible amount of pump-priming in the form of lower rates, tax cuts and a huge level of government spending. While the Fed will eventually need to raise rates, such a move is very unlikely to occur before next year.”
PRODUCTIVITY
Pace still grueling
Reports due out include June factory orders Monday, the month’s consumer credit Thursday and second-quarter labor productivity and costs, also Thursday.
Of the group, watch the numbers on employee output. Despite a hiring freeze and cutbacks at many companies, the survivors are producing more work in less time. The result has been soaring productivity, but analysts keep wondering: How long can those on the production line maintain the pace?
EQUITIES
A wild card
For the stock market, the summer dog days got under way early. After soaring by about 25 percent over three months, prices began wavering in late June and have gone essentially nowhere.
Analysts are saying that Wall Street is in a race between a rise in corporate earnings and upward pressure on interest rates.
At this point, profits are expected to grow at a low double-digit rate for the rest of 2003, and even faster next year. But if interest rates fail to cooperate, how far can a baby bull run?
The wild card for stocks could be oil prices, which have fallen less than expected in the wake of the onslaught in Iraq.